794 F.

2d 573

CLAYTON BROKERAGE CO. OF ST. LOUIS, INC.,

Petitioner,
v.
COMMODITY FUTURES TRADING COMMISSION and
Webster S.
Sturcken, Respondents.
No. 85-5177.

United States Court of Appeals, Eleventh Circuit.

July 21, 1986.

Kenton E. Knickmeyer, St. Louis, Mo., for petitioner.

Charles D. Stodghill, Whitney Adams, Washington, D.C., for respondents.
J. Martin Obten, New York City, for other interested party.
Petition for Review of an Order of the Commodity Futures Trading
Commission.
Before HATCHETT and CLARK, Circuit Judges, and ALLGOOD* ,
Senior District Judge.
PER CURIAM:

Clayton Brokerage Co. of St. Louis, Inc. ("Clayton") petitions us to set aside a
reparation award entered against it by an administrative law judge ("ALJ") with
the Commodity Futures Trading Commission ("CFTC" or "Commission") in
favor of Webster S. Sturcken. We have jurisdiction under 7 U.S.C. Sec. 18(e).

I. FACTS
2

Sturcken is a high-school educated, semi-retired carpenter and home-building

contractor. At the time relevant to this action, Edward B. Gotthelf was
registered as an associated person ("AP") employed as a broker for Clayton, a
registered futures commission merchant ("FCM"). Gotthelf was a principal

contributor to Commodity Futures Forecast ("CFF"), an advisory newsletter

distributed by Commodex, Inc., of which Gotthelf was a founder. There is no
relationship between Commodex or CFF and Clayton.
3

Sturcken received a number of unsolicited copies of CFF, through which he

was informed of the profits that could be made trading in commodity futures.
He contacted CFF to request the name of a broker and was referred to Gotthelf.
Sturcken had already learned from reading CFF that Gotthelf was the originator
of a system for trading commodity futures.

Sturcken contacted Gotthelf and they had their first meeting on June 6, 1980, at
Clayton's New York offices. Sturcken informed Gotthelf that he had no
knowledge of the basics of commodity trading. He did, however, have some
knowledge of business and investment matters. He had been a licensed real
estate broker in New Jersey. He traded on the stock market during the years
from 1968 to 1974. As a contractor, he built houses on speculation.

Gotthelf advised Sturcken that, in light of his ignorance about commodity

futures, he should open a managed or discretionary account, which would
authorize the broker to make trading decisions and to execute trades without
first securing the customer's approval. With a discretionary account, Gotthelf
stated that Sturcken could expect to receive a minimum 10% monthly return on
his investment. He notified Sturcken that small losses could be expected in the
account but that protective devices would be employed to minimize the losses
and preserve the profits. He told Sturcken that after a six-month trading
program Sturcken would be able to withdraw his entire initial investment and
continue to trade on the profits he had earned during the initial period.

Sturcken informed Gotthelf that he wanted to invest $25,000 but was told that
Clayton would only accept a managed account with a minimum balance of
$50,000. Gotthelf advised Sturcken that $25,000 of the $50,000 would be
placed in an interest bearing account and that only the other $25,000 would be
used to trade commodity contracts. Gotthelf indicated that he would trade more
conservatively at first by trading infrequently, limiting investments to a small
group of commodities and avoiding volatile commodities.

Gotthelf informed Sturcken that if some world-wide disaster or government

action should occur at the same time his commodity trading scheme was in a
short down-turn and somehow half of Sturcken's trading funds were lost, all
trading in the account would be halted, the account liquidated and a conference
called to review all transactions. He assured Sturcken that this would never

happen and related the details of several of his success stories. Gotthelf claimed
that he had never lost a client's money.
8

After reading the risk disclosure statement required by 17 C.F.R. Sec. 1.55,
Sturcken decided to abandon the idea of trading commodities and so informed
Gotthelf. Gotthelf responded by telling Sturcken that no one pays any attention
to the warning and that it is analogous to the warning on cigarette packages--it
is given to comply with the law but means nothing. Sturcken signed the
statement and other papers required to open an account, giving Gotthelf
discretionary trading authority.

Soon after the account became active, Clayton decided not to authorize the
discretionary handling of the account. On July 16, 1980, Clayton mailed notice
of this decision and the cancelled trading authorization Sturcken had executed
in favor of Gotthelf to Sturcken's New Jersey address. At this time, Sturcken
was living at his Florida address, which had also been provided to Clayton, and
he denies receiving the correspondence. Sturcken was informed of Clayton's
decision by Gotthelf, who was incensed at the decision and told Sturcken to
ignore it. He claimed that he had a contract with Clayton and would sue if
Clayton interfered with his management of the account. He insisted that he
would manage the account as before. While Gotthelf does not deny that this
interchange took place, he claims that he received oral authorization from
Sturcken before making each trade. Sturcken denies that he authorized any
transactions.

10

Gotthelf acted as the account representative until the account was closed on
February 11, 1981. Throughout the life of the account its balance fluctuated
dramatically. The account experienced large gains as well as significant losses.
After having fluctuated between net loss and net profit for several months, the
account enjoyed an overall net profit for most of October, 1980. Sturcken could
have terminated the account with a net gain at that time. Thereafter, however,
the account showed varying degrees of net loss until it was closed in February,
1981.

11

Sturcken was informed of the status of his account through confirmation slips
mailed within one day of each transaction and through month-end statements
for the account. Sturcken received this information at both addresses and
regularly reviewed the statements and slips. During October, 1980, Sturcken
signed and returned an audit request confirming the accuracy of his September
30, 1980 statement.

12

Sturcken expressed concern about the losses and a desire to get out of the

12

Sturcken expressed concern about the losses and a desire to get out of the
commodity futures market beginning as early as August, 1980. Gotthelf assured
Sturcken that all was going according to plan and that if he were patient, he
would get his money back. Sturcken claims that this pattern repeated itself
many times. Sturcken would express alarm at the large losses the account was
incurring and Gotthelf would reply that all was going well and that Sturcken
should "hang in there" a little while longer. Sturcken claims that he accepted
Gotthelf's explanations because of his respect for his expertise:

I13felt that because of his credentials some sort of master was [working] according to
plan and my part was just not to panic and all would be well.
14

Record Excerpts at 21 (letter from Sturcken to Clayton employee).

15

Gotthelf did not place the $25,000 in an interest bearing account as he had said
he would until Sturcken discovered and protested his failure to do so. Neither
did Gotthelf put into place any protective devices as he had informed Sturcken
he would do. Despite continued requests from Sturcken that he do something to
protect profits and minimize losses, Gotthelf took few, if any, steps towards
such protection.

16

Losses continued and Sturcken finally closed the account on February 18,
1981. At the time of the closing, Clayton returned to Sturcken $9,749.45 of the
$50,000 originally invested. Sturcken had previously withdrawn $10,000. Thus,
Sturcken lost $30,250.55. After closing his account, Sturcken unsuccessfully
sought an adjustment to his account from Clayton.

17

Sturcken instituted his reparation action with the Commission on July 28, 1981.
The complaint named Clayton, Gotthelf and CFF as respondents and sought
recovery of the money Sturcken had lost. A hearing was held on January 31,
1983, and on May 10, 1983, the ALJ rendered an initial decision dismissing the
claim against CFF but ordering Clayton and Gotthelf to pay reparations to
Sturcken.

18

In his initial decision, the ALJ found that statements by Gotthelf to Sturcken
fraudulently induced Sturcken to open an account with Clayton in violation of
Sec. 4b1 of the Commodity Exchange Act ("CEA"). Although the ALJ found
this conduct alone sufficient to establish liability, he found additional fraud in
Gotthelf's continued management of the account after Clayton rejected it as a
discretionary account, failure to use protective devices and continuing
misrepresentations to Sturcken about the extent of the risk of trading. The ALJ
further found that Sturcken had not ratified any conduct by Gotthelf that led to

losses in his account and rejected Clayton's contention that Sturcken had made
all trading decisions. Clayton was held responsible for Gotthelf's fraudulent
conduct pursuant to Sec. 2(a)(1)2 of the CEA.
19

The ALJ assessed damages according to Sturcken's actual out-of-pocket losses

in connection with the account. Thus, the order awarded Sturcken damages in
the amount of $30,250.55, plus prejudgment interest at 16% calculated from
February 18, 1981, the date the balance was returned, and $25 in filing fees.
The interest rate was determined by reference to the prime rate.

20

Clayton and Gotthelf timely applied to the CFTC for review of the ALJ's initial
decision. Without adopting the ALJ's order as its own or passing formally on
the issues decided therein, the CFTC issued an order denying review on
February 13, 1985. The CFTC found ample support in the record for the ALJ's
conclusion that Sturcken was fraudulently induced to open an account with
Clayton. The CFTC concluded that respondents had not disputed Sturcken's
testimony indicating that Gotthelf had significantly understated and discounted
the risks involved in commodity trading.3 Clayton's petition to set aside the
reparation award, which became final upon the CFTC's service of the order
denying review, was filed with this court on February 28, 1985. Gotthelf has
not joined in this petition.

II. ISSUES
21

Clayton raises the following issues on appeal: (A) whether Gotthelf's

misrepresentations about the risk involved in commodity futures trading
proximately caused Sturcken's losses; (B) whether Gotthelf was acting within
the scope of his employment with Clayton when he committed the acts of
which Sturcken complains; (C) whether the ALJ's award of prejudgment
interest at the prime rate was contractually barred or excessive.

22

We hold that the weight of evidence supports the ALJ's findings that Sturcken
never learned of the risk of trading but continued trading in reliance on
Gotthelf's misrepresentations, which therefore proximately caused Sturcken's
losses. We further hold that, as Gotthelf was acting within the scope of his
employment with Clayton when he made the misrepresentations, liability was
properly imputed to Clayton under Sec. 2(a) of the CEA. Finally, we refuse to
set aside the requirement that Clayton pay prejudgment interest at the prime
rate. We therefore deny Clayton's petition to set aside the award of reparations
in favor of Sturcken.

III. ANALYSIS

23

The ALJ found that Gotthelf had violated the CEA in several respects. See
supra at ----. As liability under the CEA may be premised on fraudulent
misrepresentation as to risk alone, infra at ----, and as we conclude that Clayton
is liable for Gotthelf's misrepresentations, there is no need to consider Clayton's
potential liability for other violations. We therefore address Clayton's
arguments only as they relate to its liability for Gotthelf's continued and
repeated misrepresentations about the risks of commodity futures trading.

24

A. Proximate Cause.

25

Section 4b of the CEA, 7 U.S.C. Sec. 6b,4 prohibits fraudulent

misrepresentation in connection with the making of commodity futures
contracts on behalf of another person. See Chipser v. Kohlmeyer & Co., 600
F.2d 1061 (5th Cir.1979); Moody v. Bache & Co., Inc., 570 F.2d 523 (5th
Cir.1978); see generally T. Russo, 1 Regulation of the Commodity Futures and
Options Markets, Secs. 12.32, 12.41 (1983). The risk inherent in trading is a
material fact. See Gordon v. Shearson Hayden Stone, Inc., [1980-1982 Transfer
Binder] Comm.Fut.L.Rep. (CCH) p 12,016 (CFTC April 10, 1980), aff'd sub
nom. Shearson Loeb Rhoades, Inc. v. CFTC, 673 F.2d 1339 (9th Cir.1982).
Misrepresentations about risk thus subject a broker to liability under Sec. 4b. T.
Russo, supra; Markham & Bergin, Customer Rights Under the Commodity
Exchange Act, 37 Vand.L.Rev. 1299, 1309-16 (1984) (citing cases). Section
4b, however, incorporates the common law principle that one who
misrepresents a material fact is liable only for those losses flowing from actions
reasonably induced ("caused") by the misrepresentation. Chipser, 600 F.2d at
1068; Moody, 570 F.2d at 529.

26

Clayton first argues that, whatever the nature and effect of Gotthelf's initial
misrepresentations, Sturcken must have learned about the risks of commodity
futures trading as he watched his account balance fluctuate dramatically
between the date he opened his account, in June, 1980, and the date he would
last have been able to close his account without suffering any net loss, October
30, 1980. Hence, his continued trading and resultant losses thereafter were not
"caused" by Gotthelf's misrepresentations but by Sturcken's knowing decision
to incur the risks of continued trading. If Gotthelf's misrepresentations did not
cause Sturcken's losses, there is no liability to impute to Clayton.

27

The CFTC and certain courts have held that a claimant who suffers losses after
learning of the risk of trading cannot recover for earlier reliance upon
misrepresentations about risk.5 See, e.g., J.E. Hoetger & Co. v. Ascencio, 572
F.Supp. 814 (D.C.Mich.1983); Stock v. Lincolnwood Commodities, Inc.,
[1977-1980 Transfer Binder] Comm.Fut.L.Rep. (CCH) p 20,729 (CFTC Dec.

29, 1978); see also Thompson v. Smith Barney, Harris Upham & Co., Inc., 709
F.2d 1413, 1418 (11th Cir.1983) (no liability under Rule 10b-5 for failure to
disclose risk where customer knew or should have known of risk). It follows
that until a customer learns of the risk of trading, his or her continued trading is
premised on reliance upon the failure to disclose or misrepresentations about
the risk involved, and the broker will be liable for losses resulting therefrom.
See Myron v. Hauser, 673 F.2d 994, 1006 (8th Cir.1982); Crook v. Shearson
Loeb Rhoades, Inc., 591 F.Supp. 40 (N.D.Ind.1983); cf., Karlen v. Ray E.
Friedman & Co. Commodities, 688 F.2d 1193,1198-1200 (8th Cir.1982)
(customer who lacked sophistication and experience in commodity futures
trading and who relied on expertise of broker could not knowingly ratify
unauthorized trades).
28

In this case the ALJ did not specifically take note of the fact that Sturcken
could have withdrawn from trading in October and assess the state of Sturcken's
knowledge with respect to risk at that time. However, the ALJ did find that
Sturcken never ratified Gotthelf's actions because "he was never in a position of
having sufficient true knowledge of the situation and/or his real alternatives in
order to make a decision." He also found that Gotthelf "continued actions
without full disclosure," although Sturcken expressed dissatisfaction, and that
Sturcken "accepted Gotthelf's assurances that everything was proceeding
according to plan." The ALJ concluded that "Gotthelf fraudulently misinformed
complainant as to the continued risk of success in the account."

29

The CEA sets forth the standard for judicial review of CFTC decisions. 7
U.S.C. Sec. 9 provides that:

30 findings of the Commission as to the facts, if supported by the weight of

The
evidence, shall ... be conclusive.
31

The court's task is "to review the record with the purpose of determining
whether the finder of fact was justified, i.e., acted reasonably, in concluding
that the evidence, including the demeanor of the witnesses, the reasonable
inferences drawn therefrom and other pertinent circumstances, supported [the]
findings." Myron, 673 F.2d at 1005 n. 17.

32

Our review of the record reveals that the ALJ's findings, amounting to a finding
that Sturcken never knowingly incurred the risk of commodity futures trading,
were "justified" in the sense just set forth. Although Sturcken had some
knowledge about business matters, he was inexperienced in commodity futures
trading. He sought out Gotthelf because he had been led to believe that Gotthelf
was a master of trading and had developed a scheme to ensure success.

Significantly, the ALJ, who personally observed Sturcken's demeanor, found

that "Sturcken was unknowledgeable in the field and does not possess a strong
or commanding presence of authority. Rather his nature is more one of
accommodation ... Gotthelf held Sturcken at his beck and call." The record
supports the finding that Sturcken never learned of the risk of trading but
continued trading in reliance on Gotthelf's misrepresentations.
33

Of particular significance is the fact that Gotthelf continued to misrepresent the

risks of commodity futures trading throughout the life of the account. We are
not asked to affirm a finding that a customer who entered into trading in
reliance on misrepresentations about the risk involved and suffered losses over
several months, without further being misled about the chance for ultimate
profit, never learned about the risks of trading. We are unwilling to conclude,
as a matter of law, that Sturcken should have seen through Gotthelf's excuses
and assurances to understand that the losses he had experienced reflected the
true risk of commodity futures trading. We therefore reject Clayton's contention
that Gotthelf's misrepresentations were not the proximate cause of Sturcken's
losses.6

34

Clayton also argues that the risk disclosure statement signed by Sturcken, as
required by 17 C.R.F. Sec. 1.55, was sufficient to inform Sturcken of the risk of
trading.7 This suggestion is without merit. In the first place, presentation of the
risk disclosure statement does not relieve a broker of any obligation under the
CEA to disclose all material information about risk to customers. See 47
Fed.Reg. 52,723-725 (1982) (CFTC discussion of proposed amendment to Sec.
1.55). The extent of disclosure necessary to provide full information about risk
will vary depending on the facts and circumstances of trading as well as on the
nature of the relationship between the broker and the customer. Id.

35

Furthermore, this case involves affirmative misrepresentations as to risk.

Sturcken was told by Gotthelf to ignore the risk disclosure statement. Oral
representations may effectively nullify the warnings in the statement by
discounting its general significance and its relevance to the customer's
particular situation. See Kelley v. Carr, 442 F.Supp. 346, 353-354
(W.D.Mich.1977); cf. Myron, 673 F.2d at 1007 (that customer had signed
agreement assuming risk did not exonerate broker for misrepresentation as to
risk). Perusal of the statement reveals that it would not warn a customer to
disbelieve the kind of misrepresentations involved in this case. It does not warn
the customer to disbelieve representations that certain trading strategies can
limit losses, that the broker's scheme can overcome inherent market risks, or
that certain commodities are less volatile. Those unfamiliar with the workings
of markets are unlikely to understand that no broker can eliminate or diminish

risk. The customer may be led to believe that the course of trading on which he
or she embarks is not susceptible to the extreme risk that the statement warns
"can" or "may" accompany trading. Further, the statement uses terms of art that
require explanation, without which the significance of the warning to the
particular customer may not be understood. Thus, it is not logically inconsistent
to believe the warning on the risk disclosure statement while at the same time
believing representations such as were made by Gotthelf.
36

The question is whether a customer who reads the risk disclosure statement can
be said, as a matter of law, to understand the risk of trading so that reliance on
misrepresentations by a broker is unreasonable. We cannot assume that a
customer presented with a risk disclosure statement is thereby informed of the
risk where, as here, the broker denies the need for any warning and continues to
insist that trading is going according to his plan and will eventually result in
profit.

37

B. Scope of Employment.

38

Clayton's liability for Gotthelf's misrepresentations is based on Sec. 2(a)(1) of

the CEA, 7 U.S.C. Sec. 4, which provides that "[t]he act, omission, or failure of
any ... person acting for any ... corporation within the scope of his employment
shall be deemed the act, omission, or failure of such ... corporation...."8 This
section "provides respondeat superior and general principal-agent standards for
imposing liability on employers and principals for the acts of their employees
or agents." H.R.Rep. No. 565 Part I, 97th Cong., 2d Sess. 105, reprinted in 1982
U.S. Code Cong. & Ad. News 3871, 3954. Liability based on respondeat
superior has been imposed in reparation proceedings under the CEA. See
generally Markham & Meltzer, Secondary Liability Under the Commodity
Exchange Act--Respondeat Superior, Aiding and Abetting, Supervision, and
Scienter, 27 Emory L.J. 1115, 1131 (1978) (citing CFTC decisions).

39

Clayton argues that Gotthelf's liability may not be imputed to it under this
section because he was not acting "within the scope of his employment" when
he violated the duties imposed by 7 U.S.C. Sec. 6b. Although not denying that
it employed Gotthelf as an account representative during the relevant period,
acquiesced in Gotthelf's handling the account on a nondiscretionary basis and
serviced the account during the time it was open, Clayton argues that it should
be relieved of liability for Gotthelf's fraudulent acts by virtue of its limitation of
Gotthelf's authority to nondiscretionary trading. Clayton reasons that, because
Gotthelf treated the account as if he had discretionary trading authority, any
fraud he committed in the course of acting as Sturcken's account representative
must have been outside the scope of his employment as a nondiscretionary

account representative. Assuming Gotthelf's authority was effectively limited to

nondiscretionary trading, his misrepresentations were nonetheless made within
the scope of his employment, even if he treated the account as a discretionary
one.
40

In order to determine whether Gotthelf acted within the scope of his

employment with Clayton, it is important to examine exactly what Clayton did
to limit Gotthelf's authority. The record reveals that Clayton revoked Gotthelf's
trading authorization. This authorization notified Clayton that Gotthelf was
authorized by Sturcken to act on his behalf to buy, sell or trade commodity
contracts and that Sturcken ratified and confirmed all transactions between
Gotthelf and Clayton for the account. Rejection of this authorization served
only to prohibit Gotthelf from making trades not individually authorized by
Sturcken. In effect, rejection of the authorization put Gotthelf in the same
position, vis-a-vis Clayton, that he would have occupied had Sturcken never
signed such an authorization.

41

It does not matter whether we call the account discretionary or

nondiscretionary. As we have previously discussed, Sturcken's naivete about
the commodity market and Gotthelf's overarching misrepresentations made
Sturcken incapable of entering into trades knowledgeably. He was therefore
legally incapable of authorizing or ratifying the transactions. See Karlen, 688
F.2d at 1198, 1201. This fixes Clayton's liability even if the account is
nondiscretionary. See id. at 1198 n. 5. Accepting Clayton's denomination of the
account as nondiscretionary, Gotthelf was making the misrepresentations as
Clayton's agent and was acting within his scope of employment when he made
the individual unauthorized trading transactions.

42

Clayton argues that Gotthelf breached duties owed only to discretionary

account customers. It reasons from this premise that Gotthelf's liability must be
based on an implicit finding that he acted outside the scope of his employment
as a nondiscretionary broker. (Conversely, Clayton reasons, if Gotthelf acted
within the scope of his employment, he should not be liable for the violations
alleged by Sturcken.)

43

We have found no authority interpreting the CEA that makes the distinction
suggested by Clayton. While the CFTC has stated that the duty to disclose
information about risk will vary depending on the circumstances and the nature
of the relationship between the broker and the customer, see, e.g., Gordon,
supra, it has drawn no bright line between the duties owed customers of
discretionary and nondiscretionary accounts. Rather it has adopted a more
flexible approach that requires consideration of the degree of trust placed in the

broker and the intelligence and personality of the customer. Id.

44

More importantly, we are not faced with mere breach of the duty to disclose
information, but with affirmative misrepresentations about risk. These are
separate and distinct violations of the CEA. See T. Russo, supra (discussing
fiduciary breaches and fraud separately); Markham & Bergin, supra (same).
Even were the CEA to incorporate different fiduciary duties depending on
whether an account is discretionary or nondiscretionary, it in no way
distinguishes liability for fraudulent misrepresentation by the type of account.
Clayton has not pointed out and we have been unable to find any opinions
holding or suggesting that the broker on a nondiscretionary account may
misrepresent the risks of commodity futures trading without fear of liability
therefor.9

45

For these reasons, the case on which Clayton relies to persuade us that Gotthelf
must have breached duties owed only to customers with discretionary accounts
is inapposite. Leib v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F.Supp.
951 (E.D.Mich.1978), involved a claim that a stockbroker had violated his
fiduciary duty under the Securities Exchange Act by failing to disclose to the
plaintiff-customer the consequences of the pattern of trading he was pursuing
through a nondiscretionary account. The court held that a stockbroker has no
duty to inform a customer who is managing his own account that his trading
strategy is particularly risky. The broker in Leib had done nothing to lead the
customer to believe the strategy was not risky or to encourage him to engage in
the unsuccessful course of trading in the first place. The court's discussion
distinguished the kind of information that must be disclosed to a
nondiscretionary account customer from that which must be disclosed to a
customer for whom the broker is trading on a discretionary basis. The court did
not hold or imply that a broker may misrepresent the risk of trading to a
nondiscretionary account customer with impunity.

46

Clayton does not dispute that Gotthelf would be found to have acted within the
scope of his employment were it not for Clayton's refusal to permit Gotthelf to
treat Sturcken's account as discretionary. Clayton may not escape liability for
the misrepresentations of its agent by limiting a customer who is incapable, as a
matter of law, of authorizing trades to trading through an account that requires
customer authorization. We hold that Gotthelf was acting within the scope of
his employment with Clayton when he misrepresented the risk of trading to
Sturcken.

47

C. Interest Award.

48

Clayton challenges the ALJ's decision to award prejudgment interest and to set
pre- and postjudgment interest at the prime rate (then 16%). Clayton failed to
present these issues to the ALJ or the CFTC. Our role is to review the decision
of the ALJ (or CFTC) and we will not usually decide issues first raised on
appeal. However, the CFTC decision holding that the treasury bill rate, rather
than the prime rate, should be used as the guideline for interest awards was not
issued until after Clayton had filed its Application for Commission Review of
the ALJ's Initial Decision. Because it would be unreasonable to require Clayton
to have learned of the decision and raised the issue it creates before the CFTC
prior to the CFTC's denial of review in this case, we will address the question
whether Clayton should be required to pay only the treasury bill rate of interest.

49

In Newman v. Bache Halsey Stuart Shields, Inc., 2 Comm.Fut.L.Rep. (CCH) p

22,432 (CFTC Nov. 19, 1984), the CFTC decided to adopt the treasury bill rate
as its interest guideline because it found that this rate more accurately reflects
relevant market conditions. It had previously uniformly charged the prime rate.
The CFTC expressly stated that the new rate would be applied in "all initial
decisions awarding reparations after the date of this opinion." Although the
initial decision in this case was issued long before Newman was handed down,
Clayton argues that Newman should apply in this case because the ALJ's
decision was not final until the CFTC denied review, after Newman was
decided. In the alternative, it asks that we apply Newman retroactively. We
reject these arguments.

50

When applying state statutory rates of interest, we defer to state law to

determine how and whether changes in the statutory rate are to be applied to
judgments already entered but not yet satisfied. In Parsons & Whittemore
Alabama Machinery & Services Corp. v. Yeargin Construction Co., Inc., 744
F.2d 1482 (11th Cir.1984), we were asked to apply Alabama's amended rate
statute as of the date of amendment to a judgment entered, but not satisfied, on
the amendment date. The old rate would be applied up to that date. We declined
to so apply the new rate because the Alabama Supreme Court had decided that
the new rate was to be applied only to judgments entered after the effective date
of the amendment.

51

Given that the CFTC may set its own guideline for interest rates, we must
similarly defer to its determination as to when the new rate should go into
effect. Clayton does not argue that the ALJ's award was inconsistent with the
law at the time it was ordered or that the CFTC did not have the power to adopt
the prime rate as its guideline for interest rates on reparations awards. We will
not overturn the CFTC's decision to apply the treasury bill rate only to
reparations awarded in initial decisions after Newman.

52

That the initial decision may have been subject to review, and in that sense not
final, when Newman was decided does not make any difference. The ALJ's
award was as final as is any judgment entered by a district court. Just as a state
may decide to apply a new rate only to future judgments, leaving those
judgments entered but still subject to review to accrue interest at the old rate,
the CFTC may decide to apply its new rate only to awards in future initial
decisions.

IV. CONCLUSION.
53
54

The ALJ's findings that Sturcken never learned of the risk of commodity
futures trading and relied on Gotthelf's misrepresentations about risk are
supported by the weight of the evidence. We therefore hold that Gotthelf's
misrepresentations were the proximate cause of Sturcken's losses. We also hold
that a broker who misrepresents the risks of trading acts within the scope of
employment as a nondiscretionary account broker, whether the customer's
account is treated as a discretionary or nondiscretionary one. Finally, we decline
to overturn the CFTC's decision to apply the treasury bill rate of interest only to
those awards granted in initial decisions reached after Newman v. Bache
Halsey Stuart Shields, Inc., 2 Comm.Fut.L.Rep. (CCH) p 22,432 (CFTC Nov.
19, 1984).

55

For the foregoing reasons, Clayton's petition to set aside the reparation award in
favor of Sturcken is DENIED.

Honorable Clarence W. Allgood, Senior U.S. District Judge for the Northern
District of Alabama, sitting by designation

Section 4b of the Commodity Exchange Act, 7 U.S.C. Sec. 6b, provides, in

relevant part:
It shall be unlawful ... for any person, in or in connection with any order to
make, or the making of, any contract of sale of any commodity for future
delivery, made, or to be made, on or subject to the rules of any contract market,
for or on behalf of any other person ...
(A) to cheat or defraud or attempt to cheat or defraud such other person;
(B) willfully to make or cause to be made to such other person any false report
or statement thereof, or willfully to enter or cause to be entered for such person
any false record thereof;

(C) willfully to deceive or attempt to deceive such other person by any means
whatsoever....
2

Section 2(a)(1) of the Commodity Exchange Act, 7 U.S.C. Sec. 4, provides:

For the purpose of this chapter the act, omission, or failure of any official,
agent, or other person acting for any individual, association, partnership,
corporation, or trust within the scope of his employment or office shall be
deemed the act, omission, or failure of such individual, association, partnership,
corporation, or trust, as well as of such official, agent, or other person.

The CFTC found ample support in the record for the ALJ's factual findings:
[Clayton and Gotthelf] never disputed [Sturcken's] testimony that Gotthelf: (1)
promised him he would make money by opening an account managed by
Gotthelf; (2) told him that in a few months of trading he would be able to
withdraw his initial investment and operate purely from his profits; (3) told him
that while a "world wide disaster or government action" conceivably could
cause him to incur losses of up to one-half of his investment that situation
would "never" happen; (4) told complainant that he had never lost any
customer's money; and (5) assured him that the risk disclosure statement meant
nothing and was provided only as a mere formality. Most importantly,
respondents have never challenged complainant's assertion that he decided not
to trade commodities once he read the risk disclosure statement and that he
opened an account only after respondent Gotthelf discounted its meaning and
importance....
... In light of respondent Gotthelf's continued assurances to complainant that
Gotthelf's trading strategy would be successful, the record does not support the
conclusion that complainant learned the true facts about the risks of futures
trading....
Record Excerpts at 10.

See p. ---- n. 1, supra, for the text of this section

Because of the proximate cause requirement and the fact that Sturcken could
have escaped without any loss several months after trading commenced, the
ALJ erred as a matter of law in stating that Gotthelf could be liable solely for
fraudulently inducing Sturcken to open the account

For the reasons just given, we also reject Clayton's contention that the losses
following from the December, 1980, purchase of the June, 1981, T-Bond
contract should fall on Sturcken because he initiated the trade. Were the facts as

Clayton would have them, they might relieve Gotthelf of liability for
unauthorized trading with regard to this transaction. However, Gotthelf and
Clayton are liable because Sturcken's continued participating in trading was
induced by misrepresentations about the risk of loss therefrom. By the time of
the T-Bond transaction, it was too late for Sturcken to pull out without
suffering a loss. Unless Sturcken learned of the risk of trading before
purchasing the T-Bond contract and should have closed the account in
mitigation, Gotthelf and Sturcken should be liable for all losses incurred by
Sturcken. Sturcken did not learn of the risk of trading and made this trade, like
all the others, at Gotthelf's express direction and in the hope his losses would be
reduced. This loss was also caused by Sturcken's reliance on Gotthelf's
misrepresentations
7

The risk disclosure statement signed by Sturcken provides in relevant part:

The risk of loss in trading commodity futures contracts can be substantial. You
should therefore carefully consider whether such trading is suitable for you in
light of your financial condition. In considering whether to trade, you should be
aware of the following:
(1) You may sustain a total loss of the margin funds you deposit with your
broker to establish a position in the commodity futures market. In addition, if
the market moves against your position, you may be called upon by your broker
to deposit a substantial amount of additional margin funds, on short notice, in
order to maintain your position. If you do not provide the required funds within
the prescribed time, your position may be liquidated at a loss and you will be
liable for any resulting deficit in your account.
(2) Under certain market conditions, you may find it difficult or impossible to
liquidate a losing position. This can occur, for example, when the market
makes a "limit move" against your position.
(3) Placing contingent orders, such as a "stop-loss" or "stop-limit" order, will
not necessarily limit your losses to the intended amounts, since market
conditions may make it impossible to execute such orders.
(4) A "spread" position may not be less risky than a simple "long" or "short"
position.
(5) The high degree of leverage that is often obtainable in futures trading
because of the small margin requirements can work against you as well as for
you. The use of leverage can lead to large losses as well as gains.
This brief statement cannot, of course, disclose all the risks and other

significant aspects of the commodity markets. You should therefore carefully

study futures trading before you trade.
Record Excerpts at 48.
8

See p. ---- n. 2, supra, for the full text of this section

In Karlen, 688 F.2d at 1198-1201 (8th Cir.1982), the Eighth Circuit held that a
broker cannot successfully invoke the principle of ratification to defend against
a claim of unauthorized trading where the plaintiff-customer has not assented to
the trades "voluntarily and intelligently ... with full knowledge of the facts." Id.
at 1201. Discussing the state of the plaintiffs' knowledge about commodity
futures trading, the court pointed out that the plaintiff was an unsophisticated
rancher who relied on the broker's expertise and that the broker had assured the
plaintiff that the losses he was experiencing were all part of the trading plan.
These factors, among others, led the court to conclude that the jury's verdict in
favor of the plaintiffs on their unauthorized trading claim, and their rejection of
the ratification defense, was supported by substantial evidence. Although it
appears that the broker may have misrepresented the risks of trading much as
did Gotthelf in this case, the case was submitted to the jury on an unauthorized
trading theory. The appellate court was not presented with the question of the
liability of a broker handling a nondiscretionary account for misrepresenting
the risks of trading in commodity futures